In other terms, an Increase In price means a drop in demand and a rise in supply, and vice versa. Equilibrium Equilibrium As shown In figure 1. There Is a point In which supply and demand Intersect each other, this is where the quantity of demand equals the quantity supplied, this is the ideal price that retailers and producers should set their prices, it is known as the point of equilibrium. Labeled In the diagram. Theoretically, the market will reach the equilibrium point without intervention.
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When consumers want more of a product, the producers, driven by the incentive of a profit, ill aim to meet the expectations of the consumers demand, this is called an excess in demand. Also, when consumers buy less of a product, producers will supply fewer units called an excess in supply. This principle Is known as the price mechanism. However, the price mechanism is not always successful in determining the right price for a good or service.
When the price mechanism falls to achieve the desired outcome, it is called market failure, examples where this is likely to occur is in inelastic goods such as electricity and water, no matter how much firms are willing to hare for these utilities, consumers will always need to pay for It because they are necessities in life. In order to resolve market failure, governments will often intervene to stop businesses from exploiting consumers, in the example mentioned before governments will often interfere through setting a type of price Intervention, called a price ceiling.
Price intervention refers to the setting a maximum or minimum price for a particular commodity that firms must abide by, a price ceiling is the maximum businesses, that consumers rely on for survival from abusing the fact that the market ant persist without them, and as a result the business decides on charging ridiculous amounts for its product. Another example of where the price intervention may need to interfere when businesses are imposing on individuals is in the price of labor. In Australia, there is a system of where employers must not pay their workers wages below a specific amount (minimum wage).
Currently the minimum wage for a full time adult is $15. 96 per hour, this means that the minimum an employer is legally allowed to pay their workers in $15. 96 per hour, if they go below this then workers eave grounds to make a complaint and increase their wage. This is a form of price intervention called price floors, unlike price ceilings, price floors set the minimum price for a good or service, in the example that service is human labor. The government imposes price floors on labor through the use of industrial awards, these awards set out the minimum wage and the bare necessities to a safe working environment.
Awards are required to prevent a situation like that in India, where workers are paid scarcely enough to live on while having to work like slaves Just to aka ends meet. These awards prevent the standard of living from going too low, Australia is ranked second based on the Human Development Index, India is ranked 36th, this ranking would undoubtedly be affected if government intervention in the form of industrial awards took place in an attempt to raise living standards.
In summary, price intervention is a government imposed restriction on the vertical, price axis, taking the form of a price ceiling (right), where the government sets the maximum amount a product can be sold form, or price ceilings (left) where instead of Ewing the maximum, it is the minimum amount a product can be sold for. These are both limitations on price, however the government can also place restrictions on quantity, this is discussed further. Unlike price intervention, the use of quantity intervention aims to influence the amount of particular good or service provided by the market.
The government targets products that are produced in proportions that are either too low or too high, because individual business firms and consumers to not take into consideration the social costs and benefits, related to the production and consumption of that product. These social costs and benefits are referred to as externalities. Externalities occur when the firm or individual making a decision does not have to pay for, or does not receive the full consequences of that decision. Externalities are broken into two categories; negative externalities and positive externalities.
Negative externalities are the costs that the producer or consumer does not pay have to pay for, instead society as a whole pays for it. For example, when a manufacturing business produces its wares, carbon dioxide and other pollutants are released into he atmosphere. The pollution is the negative externalities. The business does not consider the cost that pollution could have on society, but only considers factors business paying for the environmental costs, society is left to deal with it.
This is where governments intervene through the use of taxes. Take the Carbon Tax for example, the government has tried to control negative externalities of private businesses through placing a tax on carbon emissions. Another example of the government controlling negative externalities is through tariffs, an externalities of importing goods could be that local businesses loose revenue resulting in higher unemployment rates, tariffs deal with this by leveling the ‘playing field’ and increasing the price of imports.
On the other hand, positive externalities occur when the firm does not receive the full benefit of their decisions, in other words, the benefit to the firm or individual is less than the benefit to society in general. An example of a positive externalities is beekeeping, in addition to the owner of the bees getting honey, the bees will also eliminate surrounding plants, hence helping surrounding farms. In this situation the pollination of crops not owning the beekeeper, is the positive externalities.
In order to increase positive externalities, governments can provide a subsidy to support that industry, and consequentially increase the amount that particular industry produces, which, in turn will support those industries that benefit from the positive externalities. In conclusion market equilibrium is a circumstance where all supply meets the exact value of all demand, there is no excess. However the economy does not always produce the desired outcomes by itself.